U.S. sales will peak in 2016 as pent-up demand begins to ease, predicts NADA chief economist

Pent-up demand for new vehicles in the U.S., having propelled sales upward each year starting in 2010, will begin to ease over the next few years, the chief economist of the National Automobile Dealers Association said.

U.S. sales of new cars and light trucks will hit 17.3 million vehicles this year, increase 2.3 percent to a peak of 17.7 million in 2016, then slide to 17.2 million in 2017, Steven Szakaly said today during a conference call with journalists.

Szakaly said he expects annual U.S. light-vehicle sales to stay in the 16.8 million to 17 million range “at least for the next couple of years after that.”

Through October, U.S. sales grew 5.8 percent to 14.5 million vehicles. The seasonally adjusted annualized sales rate last month reached 18.23 million -- its highest since July 2005.

Szakaly said employment growth, a rising number of new households and low gasoline prices are among the economic factors that will help buoy sales in 2016.

But he cautions that new-vehicle incentives are expected to rise as 2016 progresses because manufacturers are expected “to chase market share and to chase volume.” He said he expects a 50- to 75-basis point increase in interest rates by the end of 2016.

“We don’t think this market is sustainable given the regulatory requirements with [corporate average fuel economy], rising rates and stagnant wages,” Szakaly said.

Though interest rates are expected to rise, Szakaly said he believes that finance margins will be contracted for consumers in the top credit tiers. But consumers at lower credit tiers will likely have those costs passed on to them.

He said it might also cause some vehicle buyers, especially those in the market for new entry-level vehicles, to consider used vehicles.

Jonathan Banks, vice president of valuation and analytics for the J.D. Power Used Car Guide division, was on the call with Szakaly.

He said 2015 has been an “incredible year” for the used-vehicle market. There has been a 1.9 percent increase in the supply of used vehicles up to eight years old this year -- the first increase in used-vehicle supply since before the recession.

“Prices have remained firm because of that pent-up demand,” also seen in the new-vehicle market, Banks said.

He said used-vehicle prices will soften in 2016 but not “fall from a cliff.” The supply of used vehicles next year is expected to grow by an additional 3.4 percent and the pool is expected to increase another 4.5 percent in 2017.

Off-lease vehicles “will play the most dramatic role in the used supply increases,” Banks said. “From 2014 to 2017, lease returns alone will grow by about 58 percent.”

He said overall used-vehicle prices, though firm, have followed seasonal patterns this year. He pointed out that the decline in prices of used cars was more pronounced than the decline in prices of used trucks.

For example, prices of compact cars such as the Honda Civic and Ford Focus declined 20 percent this year.

But full-size trucks, such as the Ford F-150 and Chevrolet Silverado, have held the values much better, declining only 6 percent this year.

The positive side of the influx in used-vehicle supply is that more vehicles will be equipped with the latest technology and features for consumers to choose from, Banks said.

He added: “When you consider low wage growth and the fact that we’re going to have a lot of Gen Y buyers coming into the market that might not have really high incomes, the pool of used vehicles should be very attractive for those buyers from a price point.”